In re Pioneer Ford Sales, Inc., Bankruptcy No. 8100985.

• Decision Date: 05 January 1983
• Docket Number: Bankruptcy No. 8100985.
• Citation: 26 BR 116
• Parties: In re PIONEER FORD SALES, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Rhode Island

26 B.R. 116 (1983)

In re PIONEER FORD SALES, INC., Debtor.

Bankruptcy No. 8100985.

United States Bankruptcy Court, D. Rhode Island.

January 5, 1983.

Richard S. Mittleman, Zietz, Mittleman & Webster, Providence, R.I., for Fleet Nat. Bank.

Kathleen Sullivan Murray, Carroll, Kelly & Murphy, Providence, R.I., for Ford Motor Co.

Joshua Teverow, Letts, Quinn & Licht, Providence, R.I., for Toyota Village, Inc.

DECISION

ARTHUR N. VOTOLATO, Jr., Bankruptcy Judge.

Heard on the application of Fleet National Bank, a secured creditor, with which the debtor in possession Pioneer Ford Sales, Inc., joins, for an order authorizing the sale of the debtor's Ford franchise to Toyota Village, Inc. Ford Motor Company objects to the application.

The relevant facts, as determined after hearing, are as follows:¹ On April 2, 1981 a Ford Sales and Service Agreement was executed between Pioneer Ford Sales, Inc. (Pioneer), a Ford dealer in Bristol, Rhode Island, and Ford Motor Co. (Ford). On December 8, 1981 the two principals of Pioneer transferred all their outstanding capital stock to Manchester Ford Sales, Inc., and resigned as officers and directors of Pioneer. On the next day, December 9, 1981, Pioneer filed a Chapter 11 petition.

On December 14, 1981, this Court entered an order authorizing the execution of a financing agreement between Pioneer, the debtor in possession, and Industrial National Bank (now Fleet National Bank) by which Pioneer granted Fleet a security interest in virtually all of its assets. On August 27, 1982 Fleet, in an application in which the debtor in possession joined, sought an order authorizing the sale of the interests of Pioneer and Fleet in the Ford Sales and Service agreement dated April 2, 1981. Ford objects to the application, primarily on the ground that the requirements of 11 U.S.C. § 365 have not been fulfilled. Ford also seeks to terminate the franchise agreement.

Under the proposal, the assignee, Toyota Village, Inc. (Village), will pay $10,000 for the assignment of the Ford franchise, and will purchase all vehicle parts and accessories currently in the possession of Pioneer for approximately $75,000. If this Court refuses to authorize the assignment, Ford will repurchase some but not all of the Ford parts, and no parts or accessories of other manufacturers, and the recovery in that event would be in the area of $45,000 to $55,000.

Fleet and Ford agree that the franchise agreement between Ford and the debtor in possession is an executory contract and that the proposed assumption and assignment of the franchise are governed by 11 U.S.C. § 365.²

Although the franchise provides that the agreement is "not transferable, assignable or salable by the Dealer," Ford's Exhibit 1, Preamble, Paragraph F, § 365(f)(3) explicitly invalidates such provisions,³ and the legislative history indicates that "contractual provisions that permit termination or modification in the event of an assignment are contrary to the policy of this subsection." H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 349 (1977); S.Rep. No. 95-989, 95th Cong., 2d Sess. 59 (1978), U.S.Code Cong. & Admin.News, pp. 5787, 5845.

Pioneer was in default to Ford in the amount of $15,369 as of September 24, 1982. Pursuant to § 365(b)(1), a debtor may not assume an executory contract until a default is cured (or adequate assurance is provided that it will promptly be cured) and any party suffering losses resulting from the default has been compensated (or adequate assurance of prompt compensation has been provided).⁴

John T. Saviano, the president and principal of the proposed assignee, testified originally that in his opinion his obligation to Ford would be approximately $2700, and that Fleet had agreed to cure the remainder of the default. Subsequently, however, Fleet assured the court that Village had agreed to pay "immediately . . . the Debtor's entire indebtedness to Ford." (Final Memorandum in Support of Application for an Order Authorizing the Sale of the Debtor's Ford Franchise to Toyota Village, Inc., at 2.) The Court concludes that the latter statement reflects the current agreement among Village, Fleet, and the debtor in possession, and that the assumption and any assignment of the franchise agreement are conditional upon payment to Ford by Village and/or Fleet of any amounts by which the debtor in possession is in default to Ford.

Section 365 also permits an executory contract to be assumed and assigned only if there is adequate assurance of the assignee's future performance.⁵ Such assurance may be provided in part by the assignee's financial status. In re Bronx-Westchester Mack Corp., 20 B.R. 139, 142 (Bkrtcy.S.D.N. Y.1982). Although the evidence is conflicting concerning the financial status of Village and of its sole stockholder, as well as the degree of success and/or profitability of Village's current operation, the Court finds that the applicant has sustained the burden of demonstrating that Village will be able to meet Ford's requirements. The testimony of Michael Tocci, Ford's franchising manager, that as of early October 1982, that year was the second highest profit year in history for New England Ford dealers, and that 179 of 195 current Ford dealers in the region are profitable, lends support to the argument that Village also can profitably operate the Ford franchise. Based on the record, we do not share Ford's pessimism. However, if Ford's prediction (that Village will be unable to perform the terms of the franchise agreement) proves to be correct, then Ford still has the right to terminate the agreement with Village.⁶

It is clear from § 365(f)(1), note 5 supra, that an executory contract may be assigned notwithstanding any provisions to the contrary either in applicable law or in the contract itself—such as the prohibition on assignment contained in paragraph F of the Preamble of the Ford Sales and Service Agreement (Ford's Exhibit 1). Ford argues, however, that the franchise agreement is "a non-assignable, personal contract under § 365(c)(1)(A)."⁷ This subsection, which is specifically excepted from the provisions of § 365(f)(1), clearly pertains to "executory contracts that are personal in nature." In re Bronx-Westchester Mack Corp., 20 B.R. 139, 143 (Bkrtcy.S.D.N.Y. 1982). In both the Bronx-Westchester Mack Corp. case and in Varisco v. Oroweat Food Co. (In re Varisco), 16 B.R. 634, 638 (Bkrtcy.M.D.Fla.1981), those courts found that the franchise agreements under consideration were not personal service contracts based on a special relationship between the parties. Indeed, in the case at bar, Ford took no action to terminate this alleged "personal contract"...